Accepting The Blame; In a Scandal, Should The Top Heads Roll?

By ANDREW POLLACK

Published: July 30, 1990

In a number of recent cases involving questionable corporate practices, chief executives have chosen not to abide by Harry S. Truman's credo. The buck stopped with someone lower down.

The indictment last week of Eastern Airlines and nine managers for routinely ignoring maintenance and then falsifying records is not the only recent case raising the issue of how much senior management, and the top executive in particular, should be held accountable for the wrongful actions of subordinates.

On Thursday, the General Electric Company agreed to pay a $16.1 million fine to settle charges that it had overcharged the Defense Department. The Northrop Corporation paid a $17 million fine after pleading guilty in February to charges of faking tests on weapons. The Nynex Corporation admitted earlier this month that 12 purchasing managers had attended lewd parties each year with suppliers, creating the appearance of a conflict of interest.

Then cases like the Exxon Valdez oil spill have arisen. And, in the political arena there was the Iran-contra affair, where questions were raised about President Ronald Reagan's role in a scheme to funnel revenues from arms sales to rebels in Nicaragua.

In such cases, is the chief executive responsible - and should that person pay a higher price? In the past, it has generally not been expected. When Robert Fomon, the former head of the E. F. Hutton Group, was asked several years ago about whether he should take some responsibility for an illegal check overdrafting scheme, he replied, ''No chief executive can be held accountable for any single thing that happens in a corporation.''

But some experts on ethical issues, as well as some corporate officers, say upper management must accept more responsibility. Even if those managers do not know explicitly about the actions of subordinates, they say, executives might be culpable if they have created a climate in which wrongdoing is condoned or encouraged.

''Senior management should be held accountable for unethical actions if they have put severe pressure on their employees and have not emphasized that these goals should not be achieved by cutting ethical corners,'' said Kirk O. Hanson, a professor at the Stanford Business School and president of the Business Enterprise Trust, a nonprofit institute at Stanford that examines issues of business ethics.

He and other experts say the pressures on companies today to improve performance pose a special risk of unethical behavior. In discussing the issue, they did not refer to Eastern, G.E. or any specific case.

Rules of Law and Evidence

Establishing criminal liability in such cases is a matter of law and evidence. Generally, a manager has to know of wrongdoing or to be willfully blind to it to be held criminally liable for the actions of a subordinate.

But beyond questions of criminal liability are the more fuzzy ethical questions. Should a good executive be expected to know what is happening in his or her organization? If the executive does not know, why not? And even if executives did not know, should they take responsibility because it happened on their watch?

''I think top corporate officers have serious moral responsibility,'' said Michael Josephson, the president of the Joseph and Edna Josephson Institute for the Advancement of Ethics in Los Angeles. ''I think they are not stepping up to it. I think the culture is 'shift blame, take credit.' ''

Different in Japan

But that is not the case in Japan, where chief executives resign after problems, even if they did not know about them. The chairman and the chief executive of the Toshiba Corporation both stepped down in 1987 for ''having troubled society'' after a unit was found to have illegally sold technology to the Soviet Union.

When a Japan Air Lines Boeing 747 jet crashed in 1985, killing more than 500 people, the airline's president, Yasumoto Takagi, retired after traveling across the country to express his apologies to the families of the victims. No one expected T. A. Wilson, the chief executive of the Boeing Company at the time, to resign.

Some executives in the United States have fallen on their swords.

Last year, an American Express Company executive vice president, Harry L. Freeman, resigned to accept responsibility for a campaign by the company to discredit a business competitor, Edmond J. Safra. ''Mistakes were made on my watch,'' Mr. Freeman said.

In 1987, Dennis P. Long, the No. 2 executive at the Anheuser-Busch Companies, quit as three subordinates were being investigated for accepting improper payments. He became a consultant to the company.

Indeed, management experts say it is impractical to expect top managers to know everything that occurs inside their organizations. ''In some cases, it's like trying to hold parents responsible for all the actions of their children,'' Mr. Josephson said.

Faster Business Climate

That is especially true in today's fast-moving business climate, where the emphasis has been on decentralizing and giving subordinates more flexibility in making decisions. It is also true in the case where the ethical violation is for personal gain, and the employee takes all precautions to conceal the action from superiors.